It isn't quite a merger of equals. But a partnership between the Bank of Baroda (BoB) and the Industrial Development Bank of India (IDBI)--or, possibly, an alliance between the Bank of India (1996-97 income: Rs 4,004 crore) and IDBI--could provide operational synergy, aid resource mobilisation, and improve asset quality. With the differentiation between banks and financial institutions (FIs) thinning, there is a convergence in the liability and asset side of banks and FIs, with both competing for the same corporate houses.

Operationally, a FI--with its project financing and project appraisal skills, and term lending activities--and a similarly-sized bank--with its retail funding base--can be used to complement the individual efficiencies of the two organisations. Moreover, as a working capital lender, BoB has a much wider fee product line in terms of remittance products and earns a much higher fee income from a corporate compared to a FI. It is imperative for a FI to develop its fee capability by offering these products.

For example, a hypothetical case of merger between IDBI and BoB will help the merged institution in mopping up money in the retail market--BoB has the fourth-largest network with 2,493 branches in the country-while IDBI would require considerable amount of time and effort to develop a substantial retail base and diversify the fund base, given the current size. The credit costs as a percentage of returns are higher in case of Fis by about 20 per cent vis-a-vis the bank, and a merger would help. The combined entity will be operationally efficient with a lower operating cost to income ratio of 35.80 per cent against 53.50 per cent in the case of BoB.

The merger will reduce the extend of non-performing assets (NPAs) and make the combined entity financially stronger. How? For one, prudential norms require banks to maintain 35.50 per cent of their assets under SLR and CRR which is not applicable to FIs. Also, according to a report on the banking sector by Merrill Lynch, although FIs have insisted on financing only projects of globally-competitive sizes, the commodity nature exposes their loan portfolio to higher risks. The risk is more for the FIs since higher NPAs could wipe out a large portion of the capital base, while the banks have a cushion with NPAs calculated on only 60 per cent of the assets. A merger would thus lead to a stronger entity.

Write to us   Subscriptions